In the year 2002, the IRS finally issued a Revenue Procedure for conducting reverse exchanges. It’s a very taxpayer-friendly rev proc in that the intermediary can form an entity to acquire either the new replacement property and hold it until the relinquished property is disposed of, or alternatively the intermediary can acquire title to the old relinquished property and hold it, and allow the new replacement property to be immediately received by the taxpayer.
180 Day Holding Period
In either instance, the IRS limited this holding period to 180 days under the safe harbor. They were mirroring the requirements that are in the straight exchange regulations that limit deferred exchanges to 180 days. The major criticism or limitation of rev proc 237 is that it only allows the parking arrangement with the intermediary to go on for 180 days.
When to Use a Reverse Exchange
But if you have to acquire your replacement property before you’ve had a chance to get rid of your old relinquished property, a reverse exchange can be a very effective tool to allow your acquisition to still be part of a 1031. Furthermore, in a hot seller’s market where it’s really really hard to buy because there’s lots of competition for properties, and it’s really easy to sell, many savvy investors will use a reverse exchange to acquire the replacement property in a reverse exchange so they’ve got a sure thing to exchange into, and then they’ll use their 180 days thereafter to offload or dispose of their old relinquished property.
For more information on the steps involved in reverse exchanges check out this video.
Get Help with Your 1031 Exchange
Get help with your next 1031 exchange of real estate by reaching out to Commercial Partners Exchange Company. Our qualified intermediaries have been providing like-kind exchange assistance to clients throughout the state of Minnesota and across the country for over two decades. You can find us at our primary offices in downtown Minneapolis.